Loonie looks set to rise on prospects of more rate hikes, higher oil: Poll

Anu Bararia, Reuters

BENGALURU — The Canadian dollar is likely to bounce back from its recent trough over the coming year, supported by prospects of more interest rate hikes and higher oil prices, but it probably will not strengthen as much as previously thought, a Reuters poll of currency strategists showed on Thursday.

Respondents broadly downgraded their forecasts from an October poll, suggesting expectations of further tightening by the Bank of Canada may be waning against a backdrop of continued tame inflation.

Having tumbled to a more than three-month low against the greenback in October, the loonie is now forecast to gain more than 1.5 per cent to $1.25 per U.S. dollar in the next year from around $1.27 on Wednesday.

That is much weaker than the October outlook for nearly two-per-cent appreciation to $1.23. Reuters took that poll before the dollar's latest spill.

Responses in the latest poll were based in part on data showing growth had ground to a halt in July after clocking its strongest first half in 15 years.

Forecasts ranged from $1.14 to $1.35 per greenback on a 12-month horizon, versus $1.15 to $1.31 in October, suggesting some strategists have become more pessimistic about the Canadian currency's prospects.

At 5:01 p.m. ET, the Canadian dollar was little changed, trading at 78.85 cents US.

The Bank of Canada is still monitoring the economy's performance after rate hikes in July and September, Governor Stephen Poloz said on Tuesday. It is maintaining a neutral tone on its next move.

The U.S. Federal Reserve, by contrast, seems on track to lift borrowing costs next month, for the third time this year.

Scotiabank strategist Eric Theoret said the Bank of Canada's apparent reticence about delivering another rate hike was the biggest near-term risk to the currency.

"They are definitely a lot more tentative on their willingness or their ability to complete more tightening from here, and it's much more of a muted path," Theoret said.

Markets are pricing in a less than 10-per-cent chance of a rate hike in December, while the odds of a March increase stand at about 70 per cent.

Speculators cut bullish bets on the loonie from a five-year high struck in October, according to the latest data from the U.S. Commodity Futures Trading Commission and Reuters calculations.

But not everyone is negative about the loonie's prospects.

"You could expect the Canadian dollar to make a comeback early next year," said National Bank senior economist Krishen Rangasamy. "We think the Bank of Canada is going to be a bit more aggressive than markets are currently expecting in 2018."

The loonie's correlation with the price of oil, a major Canadian export, will also become more positive, he said.

Last month, Poloz said that while monetary policy decisions would affect the Canadian dollar, oil prices would have the biggest long-term impact on the currency.

Oil prices hit their highest since early July 2015 this week as Saudi Arabia's crown prince consolidated his power with the arrest of royals, ministers and investors in an anti-corruption crackdown.

A separate Reuters poll showed oil was forecast to rally into next year on an anticipated extension of supply restrictions led by the Organization of the Petroleum Exporting Countries.

But with U.S. President Donald Trump repeatedly threatening to withdraw from the North American Free Trade Agreement, the future of Canada's relationship with its biggest partner is uncertain. Canada sends more than 75 per cent of its exports south of the border.

While a majority of respondents had previously said Canada would escape any fallout of the NAFTA talks, a poll conducted last month showed about a third of the economists who answered an extra question had turned pessimistic on the outcome and its effect on the Canadian economy.